As the European Central Bank (ECB) continues to wrestle with the decision of when and how quickly to wind down its quantitative easing (QE) program while inflation remains stubbornly below the 2 percent target and likely to stay well below 2 percent for the foreseeable future, it’s worth noting that there’s a new nightmare to add to the equation: The euro has surged in value this year, a move that not only depresses exports in recovery economies like Spain and Portugal but also depresses inflation. And one of the things holding down the value of the euro is the ECB’s QE program. So if the ECB tapers off the QE too early and quickly it’s going to make an overly-strong euro even stronger while dragging inflation even lower, potentially derailing fragile recoveries in the austerity-inflicted member states.

Adding to the ECB’s challenges is that the QE program officially expires at the end of 2017. Unless it’s extended. And as the following article notes, when you look at the schedule for the ECB’s Governing Council meetings where the upcoming QE details – with a meeting on October 26th and another on December 14th – it’s entirely possible that the ECB won’t finalize its QE details until that December 14th meeting. And if that happens, markets are only going have around 10 trading days to adjust to whatever the new QE reality is going to be going forward. And those trading days at the end of year tend to be low volume and therefore potentially much more volatile. So if there’s a big surprise, and it’s a negative surprise from the market’s perspective, we could see some wild times for the eurozone’s financial markets heading into the New Year and a wild time for the eurozone economies next year. Wild unpleasant times.

But even if the ECB does manage to make it very clear what it’s planning for the QE program well in advance of that December 14th meeting, if that decision involves a premature curtailment of the QE program that could still results in an ongoing surge in the value of the euro and further flirtations with deflation. And more wild unpleasant times for the eurozone as a surging euro starts killing off the fragile export-driven recoveries of in places like Spain, Greece, and Portugal.

And as we saw in Part 6 of this series, there’s also the ongoing issue of the QE “capital keys” that determine the volume of bonds each eurozone nation’s central bank can legally purchase without breaking the ECB’s self-imposed QE rules. In the case of Germany, which has the largest round monthly bond purchases due to the large size of the German economy, there is simply a lack of enough available bonds. But for the weaker nations like Portugal and Ireland the “capital key” cap on the amount of bonds the ECB can purchase in the QE program poses a different kind of limitation: the “cap” on the the total size of that nation’s bond market (33 percent of the total national sovereign bond market) that can be bought up in the QE program is already being hit in Portugal and Ireland and it’s going to be hit in other member states the longer QE continues, potentially forcing a premature ending to QE unless whether that’s prudent or not.

Sure, the ECB simply could change the rules that limit the available bonds to get around this limitation, but that probably won’t be an option with the Bundesbank and its allies completely opposed to the idea. And that means that we are looking at a situation where:
1. The ECB clearly wants to end QE as soon as the economic situation allows for it.

2. The rising value of the euro is making ending QE a lot less feasible at the moment because ending QE is inevitably going to make the euro rise even more and that threatens the export-led recoveries of the eurozone member states that were forced to incurred massive austerity in order to cut costs and make their economies more export-oriented.

3. Even if QE is extended significantly, unless there’s a rule change to the 33 percent cap rule there’s going to be an end to QE anyway, hitting one nation at a time as they approach that cap.

And that all means we’re in a situation where the political drive to end QE shows no signs of abating while the signals from the actual economy (persistently low inflation, fragile recoveries, and a surging euro that threatens those fragile recoveries) are increasingly warning against a hasty and ill-timed QE taper. And the ECB has to decide what it’s going to do before the end of 2017, but it can’t wait too long to make that decision because markets need time to adapt without creating turmoil in the financial markets.

The European Central Bank has a tight timetable for deciding the future of its bond-buying program, but investors may face an even tighter one to adjust to the outcome.

The Governing Council will hold its first formal talks next week on the pace of asset purchases after December, when the current program is scheduled to expire. Yet it’s conceivable that the decision won’t be finalized until the Dec. 14 meeting, according to euro-area officials familiar with the matter. That would leave around 10 trading days, during a holiday season when volumes are typically low, for market participants to sort out their strategy for the New Year.

The ECB’s 25 policy makers have plenty to talk about: some say the euro area’s robust economic recovery warrants the winding down of bond purchases — currently running at 60 billion euros ($71 billion) a month — while others point to feeble inflation as a reason to keep stimulus going. Yet leaving a decision too late could unnerve investors and push up the euro and bond yields, undermining the efforts so far.

“We’re all aware of the reality of the clock that they face,” said Charles Diebel, head of rates at Aviva Investors in London. “But markets have got very used to being told what’s coming a long time in advance, so to chance your arm and decide to wing it at the last minute in itself is like asking for trouble.”

Possible Signals

Officials are aware of the risk of waiting too long, with two of the people saying they shouldn’t surprise investors by holding back every detail on the future of QE until the final meeting of the year. That suggests the ECB is still likely to deliver signals on the plan for asset purchases after one or both of the next two meetings. A spokesman for the central bank declined to comment.

Neither would a tapering decision at two weeks notice be unprecedented. When the U.S. Federal Reserve decided to cut its own bond purchases starting in January 2014, it made the announcement on Dec. 18, 2013.

The difference is that the Fed started formal talks on tapering at their June 2013 meeting and frequently talked in public about tapering in the following months. The New York Fed even included questions on the topic in its survey of primary dealers.

The ECB has so far explicitly avoided putting the topic of next year’s purchases on the Governing Council’s agenda. At July’s session, it agreed to start discussions in “the fall,” but even then opted not to say if that necessarily meant the Sept. 7 meeting.

The slide in the euro in reaction to the news that the full details of the asset-purchase plan may wait until until December might encourage those policy makers who expressed concern at the July meeting of a possible overshoot of the single currency.

The euro’s gain after President Mario Draghi’s speech in Portugal in June — when he spoke of “reflationary forces” — and the currency’s jump again last week when he opted not to try to talk it down in a speech in Jackson Hole, Wyoming, showed how sensitive markets are. That justifies extreme prudence, with changes to communication and policy likely to move even slower than originally expected, two of the people said.

Economic Upturn

Some policy makers are more sanguine. Bundesbank President Jens Weidmann and Estonian central-bank governor Ardo Hansson have both said recently that the euro’s strength reflects the economy’s upturn and is nothing to worry about. Austrian Governor Ewald Nowotny said on Friday that he wouldn’t “dramatize” the gain.

But Nowotny also added that policy normalization can’t be about “abruptly stepping on the brake.” It’s “sensible to see how to get off the accelerator and how to carefully initiate” the process, he said. Vice President Vitor Constancio said in a separate speech that while the euro area’s economic recovery is proving to be increasingly robust, a “strong worldwide reflationary phase that seemed likely at the beginning of the year has not materialized.”

…

But for some commentators, the urgency for action is mounting because the ECB looks set to run into its self-imposed limits on how much debt it can buy from each nation, issuer and bond issue. The current schedule will take its purchases to 2.3 trillion euros, equivalent to almost a quarter of gross domestic product. The ECB’s balance sheet — fueled by free loans to banks — has soared to 4.3 trillion euros.

“Sticking your head in the sand until December and hoping the problem goes away is not a communication strategy,” said Richard Barwell, an economist at BNP Paribas Asset Management in London. “The issue limits are going to force them to exit prematurely. They cannot duck the consequences indefinitely.”

“The Governing Council will hold its first formal talks next week on the pace of asset purchases after December, when the current program is scheduled to expire. Yet it’s conceivable that the decision won’t be finalized until the Dec. 14 meeting, according to euro-area officials familiar with the matter. That would leave around 10 trading days, during a holiday season when volumes are typically low, for market participants to sort out their strategy for the New Year.”

But if it’s a last minute negative curveball that tightens conditions and simultaneously signifies a historic pivot away from ‘do whatever it takes’ and sets market expectations for significant further tightening over the next year, things could get rather choppy:

…
“We’re all aware of the reality of the clock that they face,” said Charles Diebel, head of rates at Aviva Investors in London. “But markets have got very used to being told what’s coming a long time in advance, so to chance your arm and decide to wing it at the last minute in itself is like asking for trouble.”
…

Shocking the markets out of QE complaceny does seem like asking for trouble. But sadly, we can’t entirely rule asking for trouble out. Because while Mario Draghi was reiterating his “Do whatever it takes” pledge to the markets over the past five years, we can’t forget that the Austerian wing of the eurozone https://www.dailykos.com/stories/2012/05/14/1090839/-The-Austerions. For a lot of powerful people in the eurozone’s financial power structure – notably Bundesbank chief Jens Weidmann and German finance minister Wolfgang Schaeuble – calling for trouble is their thing. For the austerians, massive trouble for the nation isn’t a problem, it’s a solution.

Really stupid economic policies like the austerity madness was the ‘solution’ inflicted on Greece to a reprehensible degree and to countries like Spain, Ireland, and Portugal to a somewhat less reprehensible degree. And the only reason that same far-right austerity agenda, an agenda that’s dominated most of the eurozone’s economic decision-making and successfully imposed austerity across Europe, hasn’t prevailed at the ECB level. And that’s because it would have imploded the entire eurozone economy and the zone itself. That’s too much trouble. But just about anything less than the implosion of the eurozone is apparently considered acceptable levels of trouble for Team Austerity. We’ve seen that over and over and there’s absolutely no indication that this has changed. Calls for trouble are very possible because they are very precedented.

Keeping the Market Uninformed isn’t the Best Policy, but Might not be as Bad as Informing the Market of Bad Policy

So hopefully the unspoken rule – the rule that national economies, but not the entire eurozone economy, can be allowed to implode – will continue ruling the day as the ECB approaches this big QE decision over the next few months. And hopefully the euro doesn’t keep surging too. But if the ECB really is going to wind down QE over the year or two it’s unclear what’s going to hold the euro down during the process. Maybe other measures will be used to hold the currency down, but the same forces that oppose QE all along have opposed all the other stimulative measures too. Will those forces be held at bay while QE unwinds? As we’re going to see, the answer to that question is “maybe?!”.

And let’s also not forget that the ECB’s need to signal to the the markets as early as possible of of its QE plans is potentially in conflict with the need to keep the value of euro down if the details of the ECB’s plans including ending QE soon too. If ending QE in 2018 really is the ECB’s plan, the euro probably has quite a bit of surging ahead of it unless something else intervenes. But the ECB can’t hold off on this decision for long. It has to finalize and release the details of its QE plans between now and its December 14th meeting at the very latest. And if those ECB plans really are plans to end QE, there’s real incentive for the ECB hold off on releasing those plans now in order to avoid the kind of euro surge that could disrupt those plans.

Euro zone countries could be in danger if euro continues to rise, economist says

The recent rise in the euro could put economic recovery in danger
“But if there would be an overshoot of the exchange rate then of course they’ll have a problem because with their large foreign debt they don’t have a second wheel on their machinery.”

A euro that continues to rise against the U.S. dollar is now the main danger being posed to fragile euro zone economies that are still recovering after the sovereign debt crisis of 2011, one economist has told CNBC.

Ireland, Portugal and Spain have become some of the fastest growing economies in Europe after receiving help from creditors to restore their finances after the crises that begun in 2011. However, the recent rise in the euro could put their recoveries in danger, according to Daniel Gros, director of the think tank Centre for European Policy Studies, told CNBC Wednesday.

“That is of course the main danger point for them,” he said.

“As long as the euro doesn’t go much above 1.20 they should be able to continue. But if there would be an overshoot of the exchange rate then of course they’ll have a problem because with their large foreign debt they don’t have a second wheel on their machinery,” Gros said.

The euro rose above the 1.20 level against the greenback on Tuesday on growing geopolitical tensions between North Korea and the U.S. A stronger euro means that European products become more expensive in international markets, which could decrease foreign appetite for European goods and thus hurt EU economies.

John Hardy, head of forex trading at Saxo Bank, told CNBC Wednesday that “we have seen a near term peak of sorts triggered as the EURUSD and dollar Index breached key levels, but the pullback suggests the USD weakness has extended too far.”

The focus has started to shift towards Frankfurt where European Central Bank President Mario Draghi is due to speak next week, following a monetary policy meeting.

Investors had been hoping to get some indications about the bank’s program to exit monetary stimulus but the recent uptick in the euro raises doubts that the ECB will announce such details.

Easy monetary policy suppresses the value of a currency and the potential end of this policy in the euro zone is seen as one of the key reasons why the euro is currently rising. A strong currency also acts as a deflationary pressure at a time when the central bank wants to bring core inflation up in the region.

…

In its latest forecasts, in June, the ECB projected headline inflation at 1.5 percent in 2017 and 1.3 percent in 2018. The bank’s target is to see inflation “close but below 2 percent.”

“Easy monetary policy suppresses the value of a currency and the potential end of this policy in the euro zone is seen as one of the key reasons why the euro is currently rising. A strong currency also acts as a deflationary pressure at a time when the central bank wants to bring core inflation up in the region.”

The markets are always watching. And they see a potential end to QE but they also see that a a rising euro is a predictable consequence of exactly that policy and also exactly the kind of change in circumstance that makes ending QE a lot harder. As a consequence, a week before the ECB’s September 7th meeting the markets could already see that the ECB’s expected ambitions were actively getting thwarted, in part thwarted by the rising euro resulting for those expected ambitions:

…
The focus has started to shift towards Frankfurt where European Central Bank President Mario Draghi is due to speak next week, following a monetary policy meeting.

Investors had been hoping to get some indications about the bank’s program to exit monetary stimulus but the recent uptick in the euro raises doubts that the ECB will announce such details.
…

So heading into the September 7th ECB meeting, the market’s were apparently expecting that the ECB wanted to announce an end QE, but the markets also recognized that attempting to an QE while the euro is surging is a highgly risky maneuver and might have to be postponed given current conditions. It’s sort of a Catch-22 situation, but not really. True Catch-22 situations don’t have an escape. In this case there is an escape – sane, sober policy – but sane, sober policy often isn’t an option for the ECB. It’s more like a synthetic Catch-22 situation created by the active decision to leave no good options.

Mario Draghi’s “No Decision Yet” September 7th Signal

What will the ECB ultimately do? Well, the ECB just met on Thursday, September 7th, and Mario Draghi did indeed give a signal. And it was quite a signal in an ironic sense: Draghi signaled that the volatility of the euro left the ECB uncertain about what to do with the QE. So he announced that they’re planning on making their decision in October, presumably at the ECB meeting on October 26th. He also signaled that inflation is expected to eventually reach 2 percent (what a bold prediction). Oh, and he noted that the QE discussions were very preliminary. And that they haven’t had any discussions at all about the “capital keys” caps on countries like Portugal that are preventing them from fully participating the QE (the countries that need it the most get thwarted). He did state that interest rates were going to remain ultra-low for an extended period, but also noted that it hadn’t been discussed yet whether or not they’ll get raised before the QE program ends.

So the signal Draghi sent to the markets was that the ECB has no idea what it’s going to do, hasn’t really talked about it, and will decide in a month and a half (hopefully). And to placate the markets he also announced that interest rates will stay low for an extended period, although they haven’t decided yet whether to raise interest rates before or after QE is ended, which is a rather mixed signal since QE could end next year. But that’s the signal Draghi had to send. In terms of calming the markets and avoiding a further surging of the euro it probably wasn’t Draghi’s best signal to the markets:

Bloomberg

Draghi Says Euro a Concern as ECB Targets October Decision on QE

* ECB cut its inflation outlook on surge in single currency
* Governors considered scenarios for recalibrating QE in 2018

Mario Draghi said the European Central Bank is watching the euro’s gains as policy makers edge toward settling the future of their bond-buying program.

“The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring” for its impact on price stability, the ECB president told reporters in Frankfurt on Thursday. He said the decisions on QE are “many, complex, and always naturally one thinks about risks that may materialize in the coming weeks or months, so that is the caution behind not specifying a date — probably the bulk of these decisions will be taken in October.”.=

The single currency rose as much as 1.2 percent as Draghi spoke to break above $1.20. It was up 0.9 percent at $1.2025 at 3:23 p.m. Frankfurt time.

The signal that a decision on bond purchases is likely next month “makes it difficult for the ECB president to talk down the euro,” said Nick Kounis, an economist at ABN Amro in Amsterdam. “The currency market is telling Draghi that talk is cheap and it is putting more weight on the upcoming QE actions.”

The euro’s surge — more than 14 percent against the dollar this year and almost 6 percent on a trade-weighted basis — was reflected in a downgrade to the ECB’s inflation outlook even as Draghi said economic growth remains solid. That highlights the difficulty policy makers face as they debate the future of their QE program — which has already topped 2 trillion euros ($2.4 trillion) and is scheduled to continue at a monthly pace of 60 billion euros until the end of this year.

ECB staff now see inflation at 1.2 percent in 2018 and 1.5 percent in 2019, well below the goal of just below 2 percent.

Still, Draghi said that there was “broad satisfaction” within the Governing Council that consumer prices will eventually converge with expectations for stronger growth.

…

The ECB chief described the discussion on the path of QE as “very, very preliminary” and that the Governing Council considered the “trade-offs” between various scenarios related to the pace and duration of purchases. Policy makers want to see the work of ECB’s technical committees before deciding, he said.

He said officials did not discuss the ECB’s self-imposed limits on the proportion of bond issues it can buy, not did they talk much about the risk the central bank will run out of debt to buy.

“We haven’t discussed really the scarcity issue because so far, he said. “We’ve consistently shown that we’ve been able to cope with this issue quite successfully.”

The ECB chief also reiterated that interest rates will be kept low for an extended period, and said officials did not discuss whether they could be raised before net asset purchases end.

““The recent volatility in the exchange rate represents a source of uncertainty which requires monitoring” for its impact on price stability, the ECB president told reporters in Frankfurt on Thursday. He said the decisions on QE are “many, complex, and always naturally one thinks about risks that may materialize in the coming weeks or months, so that is the caution behind not specifying a date — probably the bulk of these decisions will be taken in October.””

The ECB punts the QE decision from its September 7th meeting to the October 26th meeting. Six weeks. And until then the signal to the markets from the ECB is likely going to be that it hasn’t decided yet. And that’s assuming the final decision really is made and announced by that October 26th meeting. And if things get pushed back to the December 14th meeting that leaves just 10 trading days before the end of the year. It’s going to be an interesting ride for the euro in the final quarter of 2017.

And don’t forget, the higher the euro goes, the closer inflation gets to that deflationary danger zone. A danger zone the eurozone is already scheduled to flirt with over the next couple of years (hence Draghi’s expectation that inflation will “eventually” converge with the 2 percent target):

…
ECB staff now see inflation at 1.2 percent in 2018 and 1.5 percent in 2019, well below the goal of just below 2 percent.

Still, Draghi said that there was “broad satisfaction” within the Governing Council that consumer prices will eventually converge with expectations for stronger growth.
…

But also don’t forget that there are things Draghi could easily say that will bring the euro down. He could tell the markets good news that reassures it that the ECB is committed to its existing accommodative policies and a smooth landing for the QE and not some arbitrarily set deadline to placate the Ordoliberal faction’s ideological desire to end stimulative measures. Policy sanity. That would help bring down the euro. But it’s apparently not an option in this situation which is rather scary. If there’s been a saving grace for the eurozone over the last five years it’s that the ECB has been the one institution where Team Austerity didn’t always win out. If that changes we could looking at a very scary next phase of the evolution of the eurozone.

There was, however, the one thing Draghi said that should soothe markets and help hold the euro down: that interest rates would be kept low for an extended period. Although he also stated that the ECB Governing Council didn’t actually discuss whether or not rates will be raised before the end of QE. It could have been more soothing, although it could have been worse too:

…The ECB chief also reiterated that interest rates will be kept low for an extended period, and said officials did not discuss whether they could be raised before net asset purchases end.

So maybe QE will be ended next year but rates will stay low for much longer. That’s the kind of signal that should at least help keep the eurofrom surging.

But, again, if the QE program is ended soon – say, in 2018 – the question of whether or not interest rates are going to be hiked before, or only after, the QE bond buying program ends is going to be moot in a year. t’s an example of easily the ECB’s soothing words can be undermined by the rest of signaling – official and unofficial signals – which is s an important point to keep in mind because we’re entering into a potentially precarious phase of the eurozone crisis – the unwinding stimulative measures phase – and if the ECB screws this up we could be looking at more crises. One of the easiest way for the ECB to screw this up is for it to inadvertently send signals that indicate the crazy Austerity Team is taking over completely and the markets are in for a giant shock and few things are going to shock markets and spike the euro quite like a rapid pull out of the ECB’s ultra-low interest rate position. So if there’s a miscommunication on matters related to the expectations for future rate hikes that could have a significant impact on the ECB’s ability to actually unwind the QE program given how tightly intertwined the QE program is with interest rates and currency valuations.

This is seriously tricky central banker stuff going on right now in the eurozone. If the ECB tries to calm the markets it just might make matters worse. But saying nothing doesn’t help either. These are very non-ideal conditions for the end something like QE.

The 2018 Unwinding of QE to Be, According to Three Anonymous Insiders

So given the situation the ECB finds itself in – and role public signaling for the ECB, or lack thereof, is playing in the development of that situation – it’s worth noting that, according to the following report based on three anonymous people privy to ECB Governing Council thinking, the ECB has already made quite a few decisions on these matters. Mostly scary decisions. But let’s start with the pleasant part: According to these insiders, the ECB has decided whether or not it’s going to raise interest rates before the end of the QE program: no, it won’t.

And in theory that would be a relief to markets and perhaps help bring the euro down. But it turns out not be be much reassurance given the rest of what these insiders allege: that the ECB has already decided to unwind the QE program next year. Specifically, the insiders say the ECB has already planning on significant cut to the month QE bond purchases starting in January, and are only debating whether to get it by 33-66 percent. And they’re planning on ending the program entire by the fall of 2018 . So the question of whether or not those ultra-low rates rise before or after QE ends is moot in a year if what these anonymous insiders say is true. It’s the kind of report that limits the ability of Draghi to reassure markets.

Also, according to the anonymous insiders, there will be no flexibility on the national QE “capital keys” caps. They are non-negotiable and changing them (like lifting the 33 percent cap) would create legal challenges. If that’s truly the dominant position internally at the ECB at this point it’s a sign that Team Austerity – led by Wolfgang Schaeuble and Jens Weidmann – really is planning on ensuring QE effectively ends sooner rather than later whether or not there’s an officially declared end to QE. The national caps effectively put a time limit on the QE program. A limit that nations hit at different points and the nations that need it most tend to hit the caps first.

So there are now anonymous reports emanating from the ECB hinting at exactly the kind of policies that would call for a higher euro. And as we saw, if the ECB doesn’t give the final important details until its December 14th meeting that could be asking for trouble, leaving just 10 traditionally low volume market trading days before the end of the year. As we also heard from Mario Draghi, the official decision will probably come at the next meeting on October 26th. So it’s worth noting the other important policy stance indicated in the following article: the icing on the cake comes from Finland’s central bank governor and ECB board member Erkki Liikanen, who inform reporters that, while the ECB’s decision on QE might be made at the October 26th meeting, there would be a some “fine-tuning” on technical issues that prevent the final decision from happening until the December 14th meeting. And, of course, in a highly volatile environment, there could be a lot of technical issues. Especially after the ECB announces the plans these insiders are hinting at and especially if market speculation about ECBG Governing Council speculation of the markets leads the euro higher.

It’s possible this is anonymous bluster, but at a minimum it appears that Team Austerity inside the ECB, an enemy of QE all along, wants to make it look like it’s reasserting its control at the ECB level. That’s the signal the right-wing pro-austerity faction is sending to the markets via anonymous reports like the following one. And if it’s an accurate signal that means these ECB insiders just informed the markets that there’s a potentially significant shock coming up from the ECB and the shock won’t be finalized until December 14th, leaving just 10 trading days for the markets to work out at the end of the year. It’s the kind of message that’s probably not going to make Draghi’s job any easier.

It’s also important to note that these insider reports could be bluster from a minority faction. And specifically right now, this could be coming from the Berlin faction to placate the German electorate that has an election going on at the moment. Tough talk on QE is good politics in Germany’s election.

FRANKFURT (Reuters) – European Central Bank policymakers agreed at their meeting on Thursday that their next step would be to begin reducing their monetary stimulus, three sources with direct knowledge of the discussion said.

After 2-1/2 years of massive money-printing, the ECB is taking baby-steps toward weaning the euro zone off the easy cash that has helped boost the economy but is also blamed for creating bubbles in richer countries such as Germany.

The ECB left its policies unchanged on Thursday. But President Mario Draghi suggested October would be decision time regarding the future of the 2.3 trillion euros ($2.8 trillion) bond-buying program. Policymakers debated various scenarios, he said.

The four options being considered for reducing its bond buying, according to sources who asked not to be named, include cutting its monthly buying from the current 60 billion euros to 20 or 40 billion from the start of 2018, with the scheme running for another six or nine months.

The decision was likely to come at the Oct. 26 meeting and should be backed by a broad consensus, the sources said. One suggested a compromise could be found for setting monthly purchases somewhere between 20 billion and 40 billion euros.

The sources added that much of the focus of the discussion was on the overall amount of the purchases, including the reinvestment of proceeds from maturing bonds, which will slowly rise toward 15 billion euros per month next year, the sources said.

The ECB declined to comment on the report, which pushed the euro and government bond yields in the single currency bloc higher.

INFLATION

Despite solid economic growth in the euro zone, inflation has yet to rise back to the ECB’s target of almost 2 percent and has been further curbed by a recent rise in the euro against major currencies, which makes imports cheaper and exports less attractive.

The rally in the euro was raising the chances that the ECB would opt to phase out quantitative easing only very slowly next year and may look for other ways to support the economy.

The sources said policymakers also agreed that interest rates will not be raised before the asset buys end, indicating by default that any extension of the program would also push out the first rate hike.

…

LIMITS

Any extension to the bond scheme will leave the ECB exposed to the risk of running out of eligible bonds to buy under the strict conditions it has set itself to limit market disturbance and not become a blocking minority in any country.

But the sources said the so-called issuer limit, which caps any ECB buying to a third of a country’s outstanding debt, is not up for discussion because it would open the program up to a legal challenge.

Maintaining the cap and the program’s other self-imposed constraints would curtail the purchases as the ECB is already approaching its limit in several countries – notably Germany, the euro zone’s biggest economy and the ECB’s top critic.

This meant the ECB may have to deviate even farther from the national quotas adopted at the outset of the program, which determine how much debt it can buy from each country depending on its shareholding in the central bank.

Indeed, the ECB has been buying fewer German and more Italian and French bonds than it is supposed to for months, with purchases of public-sector paper issued by Germany hitting an all-time low in August.

Some technical issues may have to wait until the ECB’s last meeting of the year in December, according to Finnish governor Erkki Liikanen.

“We have a meeting in October where we will address these issues, and it could be that the fine-tuning on these issues will be made afterwards,” Liikanen told the Finnish parliament on Friday.

“The ECB declined to comment on the report, which pushed the euro and government bond yields in the single currency bloc higher.”

No comment from the ECB on the “let’s end QE in 6-9 months and slash bond purchase 33-66% in January and give the markets 10 trading days to adjust” rumored plans. *Gulp* Hopefully it’s just ECB policy not to comment on anonymous reports.

Still, that wouldn’t change the fact that there’s group of people in the ECB leaking a behind-the-scenes narrative to the press that the consensus decision has already been arrived at by the ECB Governing Council to cut QE dramatically in January and end it entirely by the fall. And while markets might not have been shocked to hear such a plan back in, say, mid April, when the euro was closer to $1.05 and not $1.20 , it’s a lot more surprising to hear plans to unwind QE in the first 6-9 months of 2018 now that the euro is $1.20 with plenty of momentum to head higher as QE unwinds.

…
Any extension to the bond scheme will leave the ECB exposed to the risk of running out of eligible bonds to buy under the strict conditions it has set itself to limit market disturbanc and not become a blocking minority in any country.

But the sources said the so-called issuer limit, which caps any ECB buying to a third of a country’s outstanding debt, is not up for discussion because it would open the program up to a legal challenge.

Maintaining the cap and the program’s other self-imposed constraints would curtail the purchases as the ECB is already approaching its limit in several countries – notably Germany, the euro zone’s biggest economy and the ECB’s top critic.

This meant the ECB may have to deviate even farther from the national quotas adopted at the outset of the program, which determine how much debt it can buy from each country depending on its shareholding in the central bank.
…

“This meant the ECB may have to deviate even farther from the national quotas adopted at the outset of the program, which determine how much debt it can buy from each country depending on its shareholding in the central bank.”

And keep in mind that this report came out on September 8th, one day after ECB chief Mario Draghi told the market that the ECB is going to need the next six weeks to wait and see and observe the situation with the rising euro to determine its QE decision. It’s a pretty strong “trouble here we come!” signal for these ECB insiders to send to the market.

The Schaueble Consensus. That’s a Thing. Uh Oh.

Although, again, it’s entirely possible that the anonymous insider report is just a story intended to placate the German electorate or disinfo for some other reason. It’s an anonymous insider report and people spread false stories for all sorts of reasons.

But unfortunately, according to the following report in the Financial Times from September 6th, German Finance Minister Wolfgang Schaeuble – arguably the most powerful person in Europe and a consistent advocate for absolutely merciless applications of austerity doctrines – has views on these matters that are more and more in line with the ECB consensus. Not entirely. Schaeuble wants an end to all ECB stimulus policies (QE and low rates and anything else) sooner than people expect, as he puts it. And while it doesn’t sound like the ECB is on board with a complete rapid reversal of all stimulus programs, it does sound like Schaeuble’s views on ending QE completely next year is increasingly the consensus on the ECB Governing Council

The Financial Times

Draghi faces another test to taper without tantrums

by: Claire Jones in Frankfurt
September 6, 2017

Mario Draghi has been wrestling with a €2tn issue throughout this year — how to rein in the European Central Bank’s quantitative easing programme without alarming the markets and slowing down the eurozone’s recovery.

Now, as the hour of truth looms for the €60bn-a-month asset purchase scheme — due to be discussed at Thursday’s ECB meeting ahead of a likely decision in October — attention is shifting elsewhere: notably, to interest rates.

“The ECB thinking into next year could be that what matters more for the euro is not the size [of] QE, but keeping…interest rate expectations anchored for as long as possible,” said Marchel Alexandrovich, economist at Jefferies International, an investment bank.

QE remains an intensely polemical topic as the ECB president can attest. Germany has always been uneasy about the bond-buying programme, while eurozone countries with lower levels of growth are much more enthusiastic about its impact on reducing borrowing costs.

Wolfgang Schäuble, Germany’s finance minister, called on Wednesday for the ECB to ditch such extraordinary crisis measures because of the strength of the eurozone recovery. “Unusual monetary policy implies it is not usual or normal — we should get back to a normal monetary policy,” he said. “We have come back to a normal situation much quicker than people thought.”

But, insofar as they refer to QE, Mr Schäuble’s remarks are in line with the consensus, which is increasingly confident of a decision next month to scale back asset purchases from January, so that the scheme can wind down next year.

Since the ECB risks running out of eligible assets if it continues purchases at their current pace and Mr Draghi has declared several times that his bank has vanquished the threat of deflation, much of the rationale for QE has gone.

That is not the case, the ECB argues, for interest rates.

At 1.5 per cent compared with a target of just below 2 per cent, inflation is still weak, partly because of the strong euro. Core inflation is even more feeble, at 1.2 per cent.

There is broad agreement within the ECB’s governing council that any decision to increase rates from their current record lows could risk throttling the recovery, despite demand for higher rates from Germany and elsewhere.

At present, the main refinancing rate is zero while the deposit rate paid by banks is minus 0.4 per cent.

Despite the healthy eurozone recovery that brought growth to 2.1 per cent for the year to June, expectations of a rate rise in the medium term have dived in recent months — particularly since a conference speech Mr Draghi gave in Sintra in June.

The initial aftermath of that speech, in which the ECB president said “deflationary forces have been replaced by reflationary ones”, was a jump in the euro, as investors judged that there would be less reason in the near future to keep interest rates low.

But ECB officials hastened to say that Mr Draghi had been misunderstood, and his speech also argued that policy “needs to be persistent” because inflationary pressures were “not yet durable and self-sustaining”.

Since then, markets for futures contracts indicate that investors have gone from pricing in a 90 per cent chance of a rate rise by the end of 2018 to a 40 per cent chance — the lowest probability on record.

One central bank official close to the deliberations said the adjustment in interest rate swaps suggested “markets were finally taking our forward guidance seriously”. That is a reference to Mr Draghi’s near-constant refrain that the bank expects rates to “remain at their present levels for an extended period of time, and well past” the time when QE is finally brought to an end.

…

Bankers — particularly in Germany — are not happy about continued ultra-low interest rates. “The real economy is doing well, the market is expecting I think an increase in interest rates or a reduction in the negative nature of interest rates. Let’s start doing that,” said John Cryan, Deutsche Bank chief executive on Wednesday, referring to an issue that also concerns Mr Schäuble. “It can’t be forever that deposit taking is lossmaking?…for banks.

The markets’ struggle to interpret Mr Draghi’s remarks over the summer has also fuelled sharp rises in government borrowing costs and contributed to the euro’s rise.

The currency’s ascendancy means in turn that a new round of economic forecasts by ECB staff on Thursday will almost certainly show inflation weakening in 2018 — complicating the bank’s task of explaining why now is the time to exit, even though next to no one expects inflation to hit its target during the next couple of years.

“If you look back at what he has accomplished in the past two or three years, Mr Draghi is probably the most successful central banker there is,” said Michael O’Sullivan, chief investment officer in the international wealth management division at Credit Suisse.

“But on the euro, he hasn’t been that forthright. There is a danger that if he doesn’t feel the need to say anything on Thursday, then the currency could draw investors and appreciate further.”

Ken Wattret, economist at TS Lombard, a research firm, said: “Inflation is still rather low, so the ECB needs to make clear that the hurdle to embark on interest rate rises is much higher than the hurdle to tapering.

“What Mr Draghi should do on Thursday is put some distance between adjusting QE and raising interest rates. He ought to emphasise that policy adjustment will be very gradual. Otherwise he risks undermining the progress which it has taken such a long time to achieve.

“Wolfgang Schäuble, Germany’s finance minister, called on Wednesday for the ECB to ditch such extraordinary crisis measures because of the strength of the eurozone recovery. “Unusual monetary policy implies it is not usual or normal — we should get back to a normal monetary policy,” he said. “We have come back to a normal situation much quicker than people thought.””

Those were Wolfgang Schaeuble’s comments on September 6th, the day before the ECB met and Mario Draghi issued his vague statement about how the ECB needs to wait and observe the situation before making any decisions on how fast to wind down the QE program. “We have come back to a normal situation much quicker than people thought.” So we have this message from Schaeuble, a supremely powerful figure, the day before Mario Draghi gives his “we’ll wait and see” speech, and then the following day we get the above report from the anonymous insiders that more or less is in line with Schaeuble’s message.

It’s rather ominous given Schaeuble’s influence because Schaeuble’s way of thinking is the default mode for how the eurozone seems to operate on all matters involving finance, except for ECB matters in recent years because that would have imploded the entire eurozone. So if Schaeuble’s way of thinking is about to replace Draghi’s relatively ‘dovish’ reign now that the eurozone is slowly recovering we really can’t rule out the ECB following Schaeuble’s lead and “renormalizing” back to a “a normal situation much quicker than people thought” over the next couple of years. Or at least much sooner than is economically appropriate (Schaeuble is a highly ideologically driven figure so economic appropriateness is never a priority for him).

But it’s extra ominous to hear Schaueble’s “renormalize it all (at any cost)” views in a report that describe’s Schaeuble’s views on QE as truly the behind-the-scenes consensus:

…
But, insofar as they refer to QE, Mr Schäuble’s remarks are in line with the consensus, which is increasingly confident of a decision next month to scale back asset purchases from January, so that the scheme can wind down next year.
…

As we’ve seen repeatedly over the past 5+ years, ever since the eurozone crisis really got into full swing, when Wolfgang Schaeuble calls for a policy it’s a call rooted in punitive Ordoliberal ideology, not practical economics. So to hear that Schaeuble’s views are the consensus view on almost anything is a big warning sign that the ideologues are once again taking over at the ECB.

But that’s the signaling coming out of the ECB and all powerful German finance minister heading into this crucial period for the eurozone economy. Ending QE was never going to be easy, but if the Ordoliberal ideologues are calling the shots during this QE wind down phase it could be a very bumpy ride. Officially, Mario Draghi is telling the markets to vaguely not worry because he’s promising to keep interest rates ultra-low for the foreseeable future even if QE is unwound next year, and maybe the ECB won’t end QE at all next year if the euro keeps surging. That’s the official message.

But unofficially the message from anonymous ECB insiders and Wolfgang Schaeuble is that the decision has already been made to kill QE next year, with rate rises presumably to follow. And if the markets decide to listen to that unofficial message instead of the official one the euro is going to just keep going higher and higher, potentially derailing the fragile export-based economic recoveries that are being used to justify ending QE in the first place.

And as the above article pointed, we saw what happens when the markets misinterpret the ECB. Back in June, when Draghi sounded like he was shifting away from guarding against deflation to guarding against inflation, the euro did exactly what you would expct: it jumped in value, contributing to the overvalued euro situation we have today:

…
Despite the healthy eurozone recovery that brought growth to 2.1 per cent for the year to June, expectations of a rate rise in the medium term have dived in recent months — particularly since a conference speech Mr Draghi gave in Sintra in June.

The initial aftermath of that speech, in which the ECB president said “deflationary forces have been replaced by reflationary ones”, was a jump in the euro, as investors judged that there would be less reason in the near future to keep interest rates low.

But ECB officials hastened to say that Mr Draghi had been misunderstood, and his speech also argued that policy “needs to be persistent” because inflationary pressures were “not yet durable and self-sustaining”.
…

But as the article also also noted, the markets have since taken the ECB’s officially messaging on interest rate guidance – don’t expect a rate rise for a while – to heart. So if there’s a decision, or market expectation, to raise interest rates soon after ending QE that could be a genuine surprise that would only send the euro higher:

…
Since then, markets for futures contracts indicate that investors have gone from pricing in a 90 per cent chance of a rate rise by the end of 2018 to a 40 per cent chance — the lowest probability on record.

One central bank official close to the deliberations said the adjustment in interest rate swaps suggested “markets were finally taking our forward guidance seriously”. That is a reference to Mr Draghi’s near-constant refrain that the bank expects rates to “remain at their present levels for an extended period of time, and well past” the time when QE is finally brought to an end.
…

Yep, markets were finally taking the forward guidance on interest rates seriously. Forward guidance that Draghi reiterated during his September 7th “we’ll wait and see” speech. And note that the current relatively high valuation of the euro has already priced in the assumption that rates are going to stay very low for an extended period of time. So, again, if there’s a surprise on higher rates sooner than expected don’t be surprised by a higher euro.

And, unfortunately, that forward guidance on rates from Draghi is the same forward guidance Wolfgang Schaeuble just completely contradicted on his September 6th comments. And the three anonymous ECB insiders who hinted at a rapid winding down of QE next year (end it in the first 6-9 months of 2018) didn’t help that official guidance either because plans for end QE next year could easily be interpreted as meaning the Schaeuble/Bundesbank faction is now completely calling the shots and that faction wants rates to rise “much quicker than people thought”, as Schaeuble put it.

So if there’s a surpise announcement that a rate rise could happen as soon as, say, next fall (after QE winds down) – or surprise unofficial signalling that the market takes to heart over the officizl signalling – that means the value of the euro is poised for some further surging. And the higher the euro goes, the less justified ending QE and raising rates becomes because that really can be a serious drag on weak economies just trying to export their way back to health after all the austerity threw them down a depression-level hole. A rising euro is a real problem for those plans to wind down QE next year.

But ending QE isn’t just a problem in terms of allowing ideology to take over from sober management and potentially destabilizing markets in all sorts of ways. The rising euro – which was always going to be a consequence of ending QE – also undermines the basic economic model that all the other EU nations were supposed to adopt after all the austerity they incurred. The Berlin-based Ordoliberal ideology that dominates the EU’s economic policies countries was the basis of the austerity demands. Countries like Greece and Spain and Ireland where supposed to take on all sorts of austerity as part of the ‘medicine’ to transform their economies into mean, lean, export machines (with an emphasis on mean, apparently). If nations incur brutal austerity they will come out stronger than before. That was the implied social contract.

And that Ordoliberal exports-at-all-costs ideology has generally viewed the ECB’s extreme stimulus measures as an unnecessary crutch that doesn’t allow the market dynamics (high government borrow costs and possible national bankrupticies) to play their course and force the necessary pain required to create economies like Germany’s. That’s the insane ideology backed by Schaeuble that typically dominates EU and eurozone decision-making on all things financial and the only reason it hasn’t dominated at the ECB level over the past five years too is that it would have imploded the whole eurozone system. But it’s entirely possible the Schaeuble wing is going to take over for the Draghi wing at the ECB as the QE unwinding phase is happening and if that happens we could see the euro rise to levels that destroy any hope for countries like Spain and Portugal to turn themselves into mean, lean, export machines. The euro will be too strong for their exports. It’ll be the final insult to all the austerity they incurred: taking away the financial ‘punch bowl’ too quickly and killing the export sectors the ‘periphery’ nations created so far.

And back in 2013 we didn’t have a whole array of stimulus measures set to be unwound that will mechanistically increase the value of the euro. But we do now and one of the key dangers in unwinding the ECB’s extreme measures like ultra low rates and QE has always been the danger of unwinding too fast. Stupidly fast. Ideologically stupidly fast. And that’s always been a danger Wolfgang Schaeuble and Bundesbank chief Jens Weidmann embrace.

Also don’t forget that the ECB has been careening towards a curtail-QE-at-all-cost modality all year and if the euro wasn’t surging the above plan would be very plausible. As we saw above, ending QE in 2018 – a move that just might mean 2018 is guaranteed to be an expensive euro year – is apparently the consensus view at the ECB Governing Council. It’s not the official signal, but it is the unofficial signal.

So while the ECB has officialy signaled to the world that it doesn’t know what it’s going to do yet because of the rising euro, unofficial signs are suggesting otherwise. And those unofficials signs point towards ECB plans that it can’t easily reveal to the markets because revealing those plans would spike the euro even more. And don’t forget, the longer the ECB waits to release its plans for next year the greater the odds of the final decision not being announced until the ECB’s December 14th meeting, leaving markets just 10 trading days left in December to process those plans. It’s quite a powderkeg situation that we’re seeing develop.

And that’s just the near-term risk we’re looking at over the next few months. The far greater long-term risk is the prospect that the austerity faction really is about to take over ECB policy making during this critical unwinding phase for QE and the rest of the ECB’s stimulus measures. That “renormalization” phase is the kind of phase that should take years to carefully execute and waiting for the right conditions. But as Wolfgang Schaeuble warned us, the austerity faction wants to see “renormalization” sooner than people expect. And as contemporary eurozone history warns us, folks like Wolfgang Schaeuble don’t actually care if their ideologically driven decisions end up damaging the eurozone’s weaker economies because that damage simply because an excuse for more austerity. Austerity is the ends and means here: creating a union of export powerhouses that derive their export prowess from their poorly paid workers. If ending QE too fast harms all these ‘periphery’ economies and forces them to impose even more austerity to deal with a strong euro that’s not a bug. It’s a feature.

Discussion

One comment for “The New World Ordoliberalism, Part 7: To QE, or Not to QE, That is the Ominous Question”

Reuters has a new piece on a set of recent polls of economist about their expectations of the ECB’s plans for its quantitative easing (QE) program and other stimulus measure like ultra-low rates. While polls of economists aren’t always all that relevant, in this case these are the kinds of polls worth watching given the importance of market expectations – in particular expectations of a higher euro that could become a self-fulfilling prophecy – will play in the ease of ECB’s likely stimulus wind down starting in January.

So if the ECB really has already decided to end QE, but not raise rates at all, it’s at least convenient if there’s already a general expectation of such a move. But there was a second poll also mentioned in the article. A poll of foreign exchange (FX) strategists asking them to predict where the value of the euro will go next and what its impact could be on the ECB’s policies. And what they expected was that the euro would keep all of its gains from this year. In other words, the pressure from the euro’s massive gains isn’t expected to recede. But even worse, according to these strategists, if the euro rises another 5 percent next year the ECB could start getting “uncomfortable”. And obviously the higher it gets the more uncomfortable the ECB is going to be and the more tempted it’s going to be to either slow down the wind down or reverse course and amp up the stimulus again.

Keep in mind that the euro has already risen 13 percent in 2017. On the one hand, if the euro has already risen that much it means some of the upward pressure on the euro expected as QE is phased out has already been released. But at the same time, it’s a sign of how much upward pressure there was at the beginning of 2017. The austerity madness of this decade necessitated quite a bit of monetary stimulus to hold something like the eurozone together. And it’s hard to believe that the formal phase out of QE, and not just expectations of a future phase out, won’t end up putting more upward pressure on the currency as the Great Unwinding of 2018 transpires.

So when you combine the expectations described in those polls it sounds like the market is expecting the ECB to end QE next year coupled with no rate next year. But the markets are also expecting that this policy is only going to require a 5 percent increase in the value of the euro before things get “uncomfortable”. And almost everything the market is expecting the ECB to do is the kind of thing that should push up the euro or, at a minimum, not push it down. It’s another reminder of how tricky the coming months are going to be for the ECB. As one of the polled economists aptly puts it, “they have to present it in a way that it is perceived by the markets as dovish instead of hawkish”:

Reuters

ECB to announce in October plans to reduce QE; buy bonds through June 2018: Reuters Poll

BENGALURU (Reuters) – The European Central Bank will announce in October a six-month extension to its asset purchase program but will cut how much it buys each month to 40 billion euros from January, a Reuters poll of economists found.

The euro zone has been performing stronger recently than at any time since the global financial crisis. That has fueled expectations that the ECB will begin scaling back its quantitative easing (QE) program after more than two years of bond buying during it which snapped up more than 2 trillion euros worth of mainly government bonds.

The Reuters poll of ECB watchers, taken Sept. 11-14, predicted that the resurgence in economic growth will be maintained over the coming year. But inflation is not expected to reach the central bank’s target of close to but just below 2 percent until 2019 at least.

Mounting optimism about the euro zone economy has led to a run-up in the euro exchange rate, posing a dilemma for the central bank as it tends to tamp down imported inflation.

ECB President Mario Draghi said at his September news conference that the central bank was looking at how to wind down its 60 billion euros of monthly asset purchases and would be ready with a plan by October.

While a Reuters poll on Sept 1 also flagged October as the most likely date, economists are now nearly unanimous. Only two of 52 surveyed thought the ECB would wait until December, when the current program is scheduled to end.

The ECB is expected to announce a six-month extension to QE, according to the consensus of 39 economists who answered an additional question, taking the program through to the end of June. Forecasts ranged from 3-12 months.

“The tricky exercise for the ECB is to actually announce that they will continue buying in 2018, but that it will peter out gradually these purchases,” said Peter Vanden Houte, chief euro zone economist at ING Financial Markets. “They have to present it in a way that it is perceived by the markets as dovish instead of hawkish.”

But the decision to start scaling back bond purchases soon is also a practical one: It already owns a huge chunk of the euro zone government bond market.

“A continuation of QE in unchanged form into 2018, as has been rumored in some quarters, does not appear to be an option…as bond supply scarcity poses a hard technical constraint on the QE program,” noted Marius Gero Daheim, senior eurozone strategist at SEB.

Asked what will be the ECB’s monthly purchase amount from January, the median response from a similar number of respondents was 40 billion euros, down from the current 60 billion. The range of views was 30-50 billion.

Asked when the ECB would close the program completely, 31 of 33 economists said by the end of next year, including six who said it could be wrapped up in the first half of 2018. The remaining two said the purchases would end sometime in 2019.

Most forecasters who were asked if the ECB was right to start unwinding its ultra-easy policy said it should. But the vast majority also said the ECB would not likely do anything with its key interest rates through to the end of next year.

FLYING EURO

The euro’s rally this year – up over 13 percent against the dollar and hit multi-year highs after the Sept 7 meeting – has some ECB policymakers worried, suggesting the pace of any reduction in QE is likely to be slow.

Draghi mentioned the currency’s strength as a concern several times at the September press conference. But ECB board member Benoit Coeure said earlier this week that the euro’s strength may have less of an impact than in the past.

A Reuters poll of foreign exchange strategists published on Sept. 7 predicted the euro EUR will hold on to most of those gains over the coming year. But they also said if the euro rose another 5 percent, the ECB would become uncomfortable.

Economic growth in the current quarter was forecast in the latest Reuters poll at 0.5 percent, up from 0.4 percent predicted last month. Median forecasts show steady 0.4 percent growth through to the end of next year.

…

Inflation is forecast to remain well below the ECB’s target until at least 2019, averaging 1.5 percent this year and 1.4 percent next. Only one forecaster had inflation at 2 percent at any point through the end of next year.

“Asked when the ECB would close the program completely, 31 of 33 economists said by the end of next year, including six who said it could be wrapped up in the first half of 2018. The remaining two said the purchases would end sometime in 2019.”

So long QE! Probably! But the ultra-low rates are hear to stay for a while. Hopefully:

…
Most forecasters who were asked if the ECB was right to start unwinding its ultra-easy policy said it should. But the vast majority also said the ECB would not likely do anything with its key interest rates through to the end of next year.
…

And hopefully there isn’t more than a 5 percent rise (e.g. going from the ~1.20 euro to dollar exchange to 1.26):

…
A Reuters poll of foreign exchange strategists published on Sept. 7 predicted the euro EUR will hold on to most of those gains over the coming year. But they also said if the euro rose another 5 percent, the ECB would become uncomfortable.
…

So that’s both optimistic and ominous, which is either optimistically ominous or ominously optimistic. And probably rather ominous when you consider the impact on the value of that euro that the presence of the austerity faction, led like Bundesbank chief Jens Weidmann and German finance minister Wolfgang Schaeuble, that is going to be sending all sorts of signals to the market that they are interested in seeing all the stimulus ended sooner than people expect, as Schaeuble put it last week.

Fortunately it sounds like the markets are mostly ok with the wind down, if these polled economists are reflective of market sentiments. And that makes sense both because QE and other stimulus measures have made some sectors of the markets a lot less profitable. There are winners and losers with QE, that’s unambiguous. It’s the kind of thing only used with the alternative is letting a financial crisis emerge and society loses.

But it also makes sense that the markets would largely be ok with the QE wind down next year since it really is a potentially good time to do it. If the eurozone’s general economic recovery continues into 2018 that would be a better time to unwind the QE than not. Especially if raising the 33 percent national caps remain non-negotiable. QE has to end sooner or later if those caps can’t be raised so during a relatively ok economic recovery is the moment to do it. Now is a ok moment to wind QE down if the national caps won’t be lifted. But it’s only an ok moment if the austerity faction doesn’t screw it up.

It was a point Jens Weidmann made last week when he argued exactly that, that now is the moment to end QE. He was right. The problem is that Weidmann is wrong on most other things due to his fascism-friendly Ordoliberal orthodoxy. Hyper-rigidity is just not a good fit for something like the eurozone. But that’s what the eurozone is based on (it’s modeled on the Bundesbank).

The other problem is that It’s a rather delicate moment for the eurozone economy at the moment that requires the kind of policies (and gentle touch) that the austerity faction leaders like Weidmann and Schaeuble have proven incapable of backing because that would violate the crazy Ordoliberal orthodoxy that justifies their far-right economic agenda that’s going to turn the eurozone into a trap for the weaker member nations. And the expectation of the Weidmann/Schaeble wing taking over policy when Mario Draghi retires in late 2019 would mean the markets can’s count on the ultra-low rates staying ultra-low for longer than 2019. What’s that going to do the euro if the markets get the impression that Jens Weidmann is going to be ECB chief in late 2019 and usher in an era of Ordoliberal orthodoxy, damn the consequences? It’s a question we have to ask since Berlin has made it clear they want Jens Weidmann to take over as ECB chief:

Dow Jones Newswires

ECB Critic Holds His Tongue as Race Nears for Bank’s Top Job

By Tom Fairless
June 07, 2017

FRANKFURT – Jens Weidmann, the German central-bank chief who made his name by loudly attacking the European Central Bank’s crisis-fighting efforts, has become a quiet defender of the ECB against its German critics.

The shift has been subtle. Mr. Weidmann still criticizes the bank’s radical stimulus measures. But his tone has softened as evidence accumulates that the ECB’s policies are working — and as the race to become the institution’s next president approaches.

“There is currently no doubt that an expansionary monetary policy stance is appropriate,” Mr. Weidmann said in a speech late last month, while suggesting he might not agree with his colleagues on the details.

Only five years ago, he was boasting of clashes with fellow policy makers, and comparing easy-money policies to drugs and alcohol.

As ECB officials gather Wednesday and Thursday in Estonia, what was once a bitter argument over the bank’s far-reaching monetary stimulus is expected instead to be a pragmatic discussion about whether to start reducing it.

Mr. Weidmann declined to be interviewed for this article.

ECB President Mario Draghi’s term ends in 2019. The jockeying to succeed him is likely to begin sometime after Germany’s national elections in September. The presidency is determined by a vote of eurozone leaders.

Mr. Weidmann has been carefully non-committal. “I make a point of never taking part in speculation on such issues,” he said in an interview last month, responding to whether he might be the next ECB chief.

But German Chancellor Angela Merkel and her finance minister, Wolfgang Schaeuble, are reportedly prepared to push for him, on the basis that no German has led the ECB, which is based in Frankfurt, in its near 20-year history.

Mr. Weidmann has been careful not to alienate his German constituency. While he has cooled his fiery rhetoric, he continues to criticize policies viewed with deep distrust in Germany, such as government-bond purchases.

Despite his unpopularity in some European capitals, Mr. Weidmann would have a strong claim for the top job. Germany is the region’s anchor economy, and the ECB was modeled on the Bundesbank. Mr. Weidmann’s predecessor, Axel Weber, was widely seen as the front runner before he pulled out of the race, a decision that infuriated Ms. Merkel. Crucially, only a minority of Eurozone governments have required bailouts — or come close. Many others are sympathetic to at least some German concerns.

With a rapprochement between the ECB and its most important shareholder, the Bundesbank, the bank could stand a better chance of winning acceptance in Germany for some of its policies. And, as the ECB navigates an exit from its stimulus, it would stand a better chance of avoiding a public fight that could confuse investors and rattle financial markets.

Mr. Weidmann’s colleagues on the ECB’s governing council are relieved about his new approach. Many had grown exasperated, complaining, usually in private, that Mr. Weidmann rejected anti-crisis measures while proposing no alternatives

Still, the Bundesbank chief’s newfound amity with the ECB is raising some concerns back home. Germans revere their conservative central bank for cementing the nation’s postwar rebound. Much of Germany’s political and economic establishment thinks the ECB’s ultra-low interest rates punish German savers while taking the pressure off sluggish European economies such as France and Italy to reform.

“I fear that Mr. Weidmann has softened his opposition,” said Jörg Krämer, chief economist at Commerzbank in Frankfurt.

Nor is it clear that a mere shift in tone will be enough to win around Mr. Weidmann’s critics in southern Europe.

When ECB President Mario Draghi repeatedly complained in public about colleagues saying “Nein zu Allem” — German for “No to everything” — it was clear whom he meant. The Italian hasn’t made that jibe recently, though.

His “period of quietness” probably has helped to soften objections in southern Europe to his potential candidacy, though it hasn’t eliminated them, Mr. Wolff says.

Mr. Weidmann is 49 years old and is a former International Monetary Fund official, He is from the southern German region of Swabia, known for its thrifty housewives that are frequently invoked by Ms. Merkel, to whom Mr. Weidmann served as chief economic adviser. He would be the youngest-ever ECB president.

The last time the ECB presidency was open, Ms. Merkel pushed for Mr. Weber. But Mr. Weber’s rift with other ECB members over the question of buying government bonds led to his resignation, and to Mr. Draghi becoming president in 2011.

With his newly restrained tone, Mr. Weidmann appears to have learned from his predecessor’s mistakes, which diminished German influence at the ECB.

Under Mr. Draghi, the ECB has become the eurozone’s most important crisis-fighter, in defiance of German orthodoxy that says central banks should stick to keeping inflation down. The institution has lent cheaply and freely to eurozone banks, cut interest rates to around zero or in some cases below zero, and bought more than EUR1.5 trillion in government bonds under its quantitative easing program (known as QE).

All of those measures provoked anger in Germany. Many people feared they would lead to inflation and undermine the stability of the euro. Mr. Weidmann led the opposition to Mr. Draghi. He warned in 2012 that, for governments, “central-bank financing can become addictive like a drug.”

“It is like an alcoholic saying that I need to get a bottle tonight,” Mr. Weidmann said at another point in the crisis as the ECB pondered how to help countries threatened by financial-market panic.

Most economists say events have largely vindicated Mr. Draghi.

The steady improvement in the eurozone’s recovery can be traced to the cumulative effect of ECB stimulus measures since 2014, says Greg Fuzesi, economist at J.P. Morgan in London. Eurozone growth outpaced the U.S. in the first quarter and inflation has jumped in recent months from zero to 1.4%, approaching the ECB’s target range.

Yep, don’t forget, “Most economists say events have largely vindicated Mr. Draghi,” because events largely vindicated Draghi’s policies at the expense of Jens Weidmann’s faction. That’s why it’s so distressing to see a Berlin power play on the ECB right now. It’s Team Always Wrong taking over. It’s almost the worst signal that could be sent during this critical period. Especially when the euro can’t rise too much in coming months. Weidmann is the king of misguided reasons for cutting off stimulus measures to an ill-advised degree. A “Weidmann for ECB Chief” push right now, when QE needs to be gently unwound, is like handing kittens a crocodile. It’s ill-advised unless you just don’t care about the kittens. That’s the reality despite the recent Weidmann happy talk (which is actually just understated unhappy talk):

…
The shift has been subtle. Mr. Weidmann still criticizes the bank’s radical stimulus measures. But his tone has softened as evidence accumulates that the ECB’s policies are working — and as the race to become the institution’s next president approaches.

“There is currently no doubt that an expansionary monetary policy stance is appropriate,” Mr. Weidmann said in a speech late last month, while suggesting he might not agree with his colleagues on the details.

Only five years ago, he was boasting of clashes with fellow policy makers, and comparing easy-money policies to drugs and alcohol.
…

And note that the above report was from June. Wiedmann playing the role of Bizarro Weidmann for months. A role he has to play until the ECB chief succession process plays out, which starts in earnest following teh German elections this month:

…
ECB President Mario Draghi’s term ends in 2019. The jockeying to succeed him is likely to begin sometime after Germany’s national elections in September. The presidency is determined by a vote of eurozone leaders.

Mr. Weidmann has been carefully non-committal. “I make a point of never taking part in speculation on such issues,” he said in an interview last month, responding to whether he might be the next ECB chief.

But German Chancellor Angela Merkel and her finance minister, Wolfgang Schaeuble, are reportedly prepared to push for him, on the basis that no German has led the ECB, which is based in Frankfurt, in its near 20-year history.

Mr. Weidmann has been careful not to alienate his German constituency. While he has cooled his fiery rhetoric, he continues to criticize policies viewed with deep distrust in Germany, such as government-bond purchases.

Despite his unpopularity in some European capitals, Mr. Weidmann would have a strong claim for the top job. Germany is the region’s anchor economy, and the ECB was modeled on the Bundesbank. Mr. Weidmann’s predecessor, Axel Weber, was widely seen as the front runner before he pulled out of the race, a decision that infuriated Ms. Merkel. Crucially, only a minority of Eurozone governments have required bailouts — or come close. Many others are sympathetic to at least some German concerns.
…

“But German Chancellor Angela Merkel and her finance minister, Wolfgang Schaeuble, are reportedly prepared to push for him, on the basis that no German has led the ECB, which is based in Frankfurt, in its near 20-year history.”

Merkel and Schaeuble want this to happen. Weidmann is playing nice-ish. The ECB is looking scary in 2020.

And it’s not like suddenly muting his non-stop opposition to virtually all of the ECB’s stimulus measures is going to make everyone forget the agenda Weidmann represents. So a big fight over Weidmann is something that might also play out as QE unwinds.

But is Weidmann’s arrival inevitable? Well, as the following article suggests, not quite. But as the following article also suggests, someone from Germany does appear to be the inevitable ECB replacement. Just maybe not Jens Weidmann. Maybe. Apparently his Mr. Nice Guy act hasn’t worked.

France and Italy just reportedly signaled to Germany that they would agree to a Berlin ECB chief after Draghi, but not Weidmann. And Berlin is like, “We have just one qualified candidate on offer, and it is Weidmann”. It’s potentially the latest psychodrama of despair for the eurozone, but the French and Italian governments totally deny the story.

FRANKFURT (Reuters) – France and Italy have signalled to Germany that they are open to a German becoming president of the European Central Bank but not if it is Bundesbank chief Jens Weidmann, Der Spiegel reported on Friday.

The German magazine said that representatives from France and Italy had informed German Finance Minister Wolfgang Schaeuble and his officials of their position.

Paris and Rome fear Weidmann, a long-time critic of the ECB’s quantitative easing programme, would oppose a flexible and pragmatic monetary policy in times of crisis, but Der Spiegel suggested Berlin was unlikely to agree with that view.

“We have just one qualified candidate on offer, and it is Weidmann,” it quoted an unnamed source close to the German government as saying.

…

France’s finance ministry also declined to comment when contacted by Reuters, but a French government source said there were no such discussions at this stage.

An Italian government spokesman said the Spiegel report was “completely false”.

The term of the current ECB president, Italy’s Mario Draghi, expires in late 2019.

“Paris and Rome fear Weidmann, a long-time critic of the ECB’s quantitative easing programme, would oppose a flexible and pragmatic monetary policy in times of crisis, but Der Spiegel suggested Berlin was unlikely to agree with that view.”

Fears that inflexible, unpragmatic policies and Jens Weidmann are a package deal. Those are the fears France and Italy reportedly expressed to Germany and those are indeed reasonable fears. The problem is that they’re reasonable fears even if it’s a non-Weidmann’s alternative instead unless that non-Weidmann’s alternative has Bizarro Weidmann policies, something highly unlikely, tragically.

And what was Berlin’s reported response? “We have just one qualified candidate on offer, and it is Weidmann”:

…
“We have just one qualified candidate on offer, and it is Weidmann,” it quoted an unnamed source close to the German government as saying.
…

It’s Weidmann or the highway. Oh dear.

So that’s the signal that is getting sent to the markets right now about who they can expect at the helm of the ECB in just a couple years. Jens ‘always Ordoliberal, often wrong’ Weidmann, would take over for Draghi in December 2019. it’s a problem. Especially when Berlin reportedly says Weidmann is “the one”.

Also don’t forget that the race to replace Draghi hasn’t really gotten underway yet. So the full impact on market expectations for a much stronger euro during a looming Weidmann era hasn’t really been felt yet because the succession race isn’t yet underway. But it’s coming soon. Right in the middle of this critical QE unwinding period when a surging euro is exactly what the eurozone doesn’t need. Oh goodie.

Now, it’s important to point out that a rising euro doesn’t have to be such a problem for the eurozone and would actually help alleviate Germany’s egregious export surplus. There’s no economic law that says the eurozone can’t implement other policies to help blunt the impact on the weakest nations expected to export their way out of the deep depressions they were thrown into. That’s always an option. For instance, if the eurozone was set up like the US as a transfer union that allows money to just flow from the wealthy states to poorer, in perpetuity if need be, and no one makes a big deal out of it that kind of system could enable a stronger euro without the peripheral cruelty. It’s very a uniony thing to do. Super helpful in many senses. But that kind of transfer union system simply is not possible in the eurozone given the political opposition, primarily in Germany which is the nation that would be paying out the most for such a transfer union structure (while accruing plenty the immense benefits in return). So the eurozone, as it’s structured today, is not well prepared to deal with the consequences of a strong euro to the periphery nations, but it doesn’t have to be that way. It’s a consequence of bad politics associated with bad economics.
It’s also important to note that if the eurozone was ever turned into the mean, lean, export machine that the austerity policies were supposed to do (as opposed to just creating mass unemployment, mindlessly cutting useful spending, and destroying families and futures, but with a few new export sectors), having the eurozone operating with massive export surpluses like Germany is a global nightmare. It would precipitate one crisis after another. You can’t have the eurozone, which could grow, operating with massive trade surpluses indefinitely. So if there was a way for the eurozone to operate at a higher euro without throwing its weakest economies into a new round of crises that would be great.

And it’s also important to note that it’s entirely possible the euro’s rise won’t be enough to have a significant negative impact. Maybe the general eurozone recovery continues and exports to other eurozone members (which wouldn’t be as sensitive to a rising euro) is the primary driver of the recovery and it all works out. But if we do see a significant further rise in the euro with a significant negative impact to countries particularly sensitive to a rising euro the peril is that the eurozone has already demonstrated that it doesn’t have many tools other than ECB measures already employed to counteract the negative effects of a rising euro for the affected nations. The fiscal stabilizers don’t exist and can’t exist to a meaningful extent due to ideology.

It’s reflection one of the fundamental problems with the eurozone: the currency is shared but not the burdens that come with it. Because you would need a transfer union and a real union in spirit (like a real European identity that supersedes existing nationalism) for something like that to work. And right now it doesn’t exist. That’s why stuff like a the potential negative impact of the rising euro in the face of the Great QE Unnwind matters so much. The eurozone is artificially fragile due to its stupid far-right Ordoliberal ideology. Fiscal stimulus is off the table. Transfer union sharing is off the table. The ECB is the only tool. And the ascendance of Jens Weidmann as the next ECB chief signals a transition to a new phased were even the ECB’s tools are taken off the table heading into 2020. That’s why this is such a bad signal to have Weidmann jockeying to replace Draghi at this point in time. It both signals a stronger future euro and no meaningful ECB response if that stronger euro screws things up.

On the plus side, the fact that a Weidmann era would probably be one where the ECB is much less useful for containing crises than it has been under Draghi means that, while the markets might perceive a looming era of Jens Weidmann becoming ECB chief as a strong euro sign, it’s also hard to ignore the fact that if there’s one thing that could cause a reversal in this stimulus-wind down policy it’s a big economic crisis created by Weidmann’s addiction to stupid policies. A big enough crisis could force even a Weidmann-run ECB to implement appropriate levels of stimulus and if there’s one thing that can create a giant crisis it’s Jens Weidmann becoming ECB chief. It’s a catch-22 that oddly sort of helps the situation. The upward push that a Weidmann ECB era has on the euro has to be pared by the downward push of the peril a Weidmann ECB places on the real eurozone economy. Don’t forget, Mario Draghi has been proven right with his loose stimulus policies at Jens Weidmann’s expense. And Weidmann is his likely replacement. Which might help keep the euro down because expectations of a new era of open crisis isn’t going to be great for the value of the euro. The bad news is kind of good news in this context. So there’s that. Yay.

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